After a decade and a half, Ukraine’s parliament has voted to end the government’s Hr 30 billion standoff with Ukrnafta.
Under bills 4120 and 4119, approved on Nov. 17, state energy company Naftogaz will get a Hr 32.2 billion ($1.13 billion) payment package from the national budget.
After subtracting Hr 5.8 billion ($203 million) in income taxes from this package, Naftogaz will add its own money and pay Ukrnafta Hr 15.1 billion ($531 million) to repay its debt from 2006 and Hr 24.1 billion ($850 million) more for future gas deliveries.
Ukrnafta will then use this money to finally pay its taxes and late fees to the government, which have been estimated to be in excess of Hr 30 billion ($1.05 billion).
One or another version of this solution has been kicking around in the courts and the Cabinet of Ministers for more than a year now. Naftogaz and Ukrnafta reached the initial agreement in spring 2019, but it had been blocked by former Prime Minister Volodymyr Groysman.
State-owned Naftogaz controls 50% plus one share of Ukrnafta. Enterprises connected to oligarch Ihor Kolomoisky control more than 42%. Ukrnafta now has tax debts that accounts for almost a fifth of the national total after it stopped paying taxes in 2014-2015.
Without question, Naftogaz owes money to Ukrnafta. In 2006, then-Prime Minister Yulia Tymoshenko’s government forced Ukrnafta’s gas to be sold at below market rates through Naftogaz.
But using the budget to pay it back has been controversial because it’s technically a way to pay a Kolomoisky-owned enterprise using taxpayer money.
Kolomoisky allegedly siphoned Hr 14 billion out of Ukrnafta using his companies, according to the National Anti-Corruption Bureau.
Sergey Kuyun, the head of oil and gas consultancy A-95, said that Ukraine has to pay this price if it wants to resolve the situation. He noted that the money will go to Ukrnafta and not into Kolomoisky’s pocket.
“The algorithm is like this: The Cabinet of Ministers pays its debts to Naftogaz, Naftogaz pays its debts to Ukrnafta and Ukrnafta pays back its money to the Cabinet,” said Kuyun.
Gennady Kobal, head of ExPro consultancy, agreed that this is mostly a positive development.
Nevertheless, backchannel agreements may be involved. Shortly before the vote, Andrii Kobolev, Naftogaz’s CEO was seen meeting with Kolomoisky’s close associate, Mykhailo Kiperman, according to video by the Radio Free Europe/Radio Liberty investigative program Schemes. According to the program, Kolomoisky also met with interior minister Arsen Avakov.
Kobolev told Schemes that, in the course of his work, he has to meet with all kinds of people, from Russian President Vladimir Putin to Ukrnafta’s representatives.
Kolomoisky told Schemes that they could not have been discussing the Ukrnafta debt as that falls outside Kiperman’s responsibilities. He also called the timing of the meeting days before the parliamentary vote “a coincidence.”
The payment would help Ukrnafta stabilize its income and regain access to bank financing.
“After being cleared of this tax debt, Ukrnafta will be able to develop, invest, get credit and so on,” said Andrii Boytsun, a member of Ukrnafta’s supervisory board.
Kuyun said that, because Ukrnafta’s property and cash flows are under arrest, the company resorts to clandestine schemes to do business behind the government’s back. Removing the arrest may allow the company to operate legitimately.
The news site Liga quoted a highly placed Naftogaz expert, who said that it might also lead to a better decision in Stockholm arbitration court, where Ukrnafta’s minority stakeholders are suing the government.
Kuyun and Kobal said it’s difficult to say whether that’s true. On the one hand, it’s likely that the decision has been made already.
On the other hand, just because the law has passed parliament, doesn’t mean that the money will actually change hands.
Under the legislation, the money has to come out of this year’s budget, which is already strained as it is. The transfer is very complicated, organizationally. If the money fails to be transferred this year, parliament will have to pass another law in 2021.
Boytsun said the company is “counting on the deal taking place this year.”
